Understanding Appraisal Contingencies

Understanding Appraisal Contingencies

Making an accepted offer and putting down a deposit on your dream home isn't always the end of the story. Unfortunately, if the house is appraised for less than your offer, the bank may not grant you a mortgage. When situations where this occurs, appraisal contingencies come into play.

The majority of real estate contracts include 3 contingencies that must be met before the contract becomes legally binding. When one of these conditions is not met by a certain time, the contract is null and you receive a refund of your deposit.

1. Appraisal Contingency

This condition states that the house has to be appraised at or higher than the listed sale price. A licensed appraiser is hired by your bank to determine the value of the home. A fair value is assessed to the home based on its condition, location, and comparable properties in the area. The bank will then loan you the amount the house is appraised for. If the seller accepts an offer higher than the appraised value and will not lower their price, the buyer is allowed to walk away and get their money back from the deposit.

2. Finance Contingency

The finance contingency can function in much the same way as the appraisal contingency. Again, it allows you to exit the contract if the bank refuses to approve your mortgage when a home is appraised for less than the offer. The finance contingency allows the buyer to make up the difference themselves when the bank agrees to the smaller loan.

3. Inspection Contingency

The most straightforward of the contingencies, this one means that the home must pass an inspection.

Just because your home is appraised lower than you expected, it does not mean that the deal must be walked away from. You can request a second appraisal

from the bank. When you do this, you will need to present evidence showing why the home is worth more. You will get a loan for the full amount if this additional

appraisal shows that the house is more valuable.

When the real estate market is hot, it might make sense to avoid contingencies. When sellers get competition amongst buyers, they gravitate towards the contracts with the least conditions. This can cause a whole other set of difficulties for you. You should always prepare for not getting the loan or having to prove you have the full cash amount to the seller.